Mortgage rates hit 10-month high

NEW YORK (CNNMoney.com) -- Mortgage rates jumped to the highest level in 10 months after recent reports on unemployment, wage growth and labor costs fanned growing fears about a pickup in inflation, Freddie Mac said Thursday.

The average rate on 30-year fixed-rate loans climbed to 6.53 percent for the week ending June 7, from 6.42 percent the previous week. Last year at this time, 30-year mortgage rates averaged 6.62 percent. The rate is the highest since Aug. 10, 2006, when it averaged 6.55 percent.

The 30-year rate stood at 6.15 percent on May 10th, just before it turned sharply up.

Doug Duncan, chief economist for the Mortgage Bankers Association (MBA), expects mortgage rates to top out near 7 percent by the end of the year.

Rising rates, among other factors, have caused the MBA and the National Association of Realtors to push back their forecasts for a home price recovery. Both groups are now looking to early 2008, compared with a previous outlook for mid-2007.

"Mortgage rates climbed this week owing to market concerns about a tight labor force and wage growth," Frank Nothaft, Freddie Mac vice president and chief economist, said in a statement. He noted that reports pointing to a tight job market and rising labor have fanned inflation fears on Wall Street.

Still, he said the housing market could potentially see a recovery within several months, since prices have leveled off and are even falling in some markets.

"As house prices grow less quickly and household incomes rise, the housing market will likely recover from its current slump, but perhaps not before the end of this year," he said.

The danger, however, according to Richard DeKaser, chief economist for National City Corp, is that mortgage rate increases are playing out "at the precise time that the housing market is trying to find its legs." A substantial move up could pull the carpet out from under the market.

The question then becomes at what rate should we start to really worry. "What we want to avoid is breaking new highs," said DeKaser. "We've seen levels last summer akin to what they are now."

Mortgage rates reflect the yields in the Treasury market, which have also risen substantially this month as strong global stock market returns have lured investors away from bonds, lowering their prices. Bond prices and yields move in opposite directions.

In fact, the yield on the 10-year Treasury jumped above 5 percent Thursday, the highest it has been since last August.

Robust economic growth outside of the housing market with healthy consumer and improving business spending has added to upward pressure on rates.

One-year ARMs averaged 5.65 percent, up from 5.57 percent last week and 5.63 percent a year ago.

Mortgage rates, of course, are only one third of the affordability equation that plays out in the housing market. There's also home prices themselves and household incomes, both of which have been positive lately for buyers, according to DeKaser.